Some Implications of Credit Spending: A Brunei Case Study

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Some Implications of Credit Spending A Brunei
Case Study

• Dr Teo Siew Yean
• Mr Gabriel Yong

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Definition of Consumption

• Consumption is normally the largest Gross
  Domestic Product (GDP) component
• There are two definitions of consumption. First,
  consumption may be divided according to the
  durability of the purchased objects, for example,
  durable goods (such as cars, refrigerators,
  televisions)
• non-durable goods (such as groceries) and
  services (laundry service, restaurant expenditure)

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Why we spend?

• consumption is classified according to individual
  needs, and a commonly defined classification is
• ? C ?F ?CL ?Ho ?R ?U
• ?AP ?P ?WH ?E ?ET
• where ? ? ?

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We spend on

• (a) food
• (b) clothing and foot wear
• (c) housing
• (d) cars
• (e) utility bills
• (f) furniture, household appliances and services
  such as
• plumbing services, changing bulbs,
  etc.
• (g) communication technology and phone, internet
  bills
• (h) wellness and hobbies
• (i) education
• (j) entertainment

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How far can we spend

• Cash (monthly earnings, bonus,
• dividends, gifts charity, winnings, etc.)
• Credit (personal loan, car loan, mortgage, credit
  card)

This empirical model is available upon
request...
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Credit Spending?

• Credit is a growing part of our day-to-day lives,
  especially in urban cities
• Most of us have loans, or other credit, which can
  be managed without difficulty if the person has
  the discipline to repay a minimal amount every
  month
• Borrowing can be a useful tool to help households
  smooth their expenditure over time

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Debt Vs Over-Indebtedness

• Debt is not the same as over-indebtedness
• Debt only becomes a problem when people cannot
  afford the repayments. It becomes a problem when
  it turns to over-indebtedness

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Debt Vs Over-indebtedness, cont.

• Over-indebtedness has a cost
• (a) a cost to consumer in terms of running the
• risk of personal bankruptcy
• a cost to banks/creditors in terms of outstanding
  loans
• a cost to businesses in terms of profits cut
• a cost to the Government in terms of debt
  collection and enforcement
• a cost to the overall economy in terms of job
  cuts and economic instability

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Credit performance in Brunei

• Reported by random phone
• interviews, about 45- 50 percent of
• Brunei bank customers apply for credit
• facilities (personal loan, car loan,
• mortgage, credit card/s) from bank
• which they keep their savings account

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COMMON ASSERTIONS Credit spending drives economic
growth But credit expansion leads only to short
term growth Credit-spending keeps consumers in
perpetual debt
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(No Transcript)
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Comparison between Brunei Singapore

• Singapore Straits Times (reported 1st January
  2005)
• credit card holders 2.95 million
• gt an average 1.2 Sporean owns a credit card/
  1 person owns more than a card
• Total credit 2.64 billion
• gt an average of SGD895 amount owed per card
  holder

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Comparison between Brunei Singapore, Cont

• Brunei Fiscal Monetary Report, 2004
• Credit card holders as at Sept 2004
• 94,211
• gt an average of 25 percent of Brunei
• population owns credit card/s
• Total rollover credit as at Sept 2004
• 160 million
• gt an average of BND1698 credit card debt per
  card holder

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The main objective of this paper is to find out
how credit consumption affect the economy
CCS Am R I
(1) where CCS cumulative credit
spending AM amount owed R is the monthly
repayment I is the interest rate charged on
amount owed every month Rt1 m.CCSt1
(2)
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Cont
A future oriented consumer is more likely want to
settle his credit debt promptly so he could
avoid to pay huge interest on amount owed and
also enable himself to spend more in the future.
Consumers in this category are more likely to
have higher rate of repayment. There is a direct
relationship between R and m. On the other
hand, a present oriented consumer does not mind
to pay more on interest rate charges to maintain
his spending power. In this scenario, the
consumer pays a smaller m and has a high CCS.
However, he has to compromise this high
availability to spend by paying higher rate of
interest each month.
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Cont
It1 (0.24/12). (CCS - Rt1)
(3) AS t1 Y -
CCSt1 (4) Therefore, available
spending, AS t, depends on the level of income Y
and CCSt1. We hypothesise that people spent on
credit because they believe they can pay off the
debt with future earnings. And as their level
of CCS falls, they would tend to save more of
their income for the future.
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Simulation exercise BND 1,200, credit limit
BND5,000
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Simulation exercise BND2,600, credit limit
BND8,000
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Simulation exercise BND3,500, credit limit
BND10,000
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Findings from previous figures

• According to random phone interviews, findings
• showed that about 70 percent of consumers are
• disciplined spenders, that is, they do make
• repayments (fixed - BND40 or minimal - 5 percent)
  
• on their loan every month

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However, there are a few implications that have
to take into consideration to prevent the
anaconda effect
1. creates a short-term expansionary effect that
likely to end up with inflationary pressure or
an overheated economic growth that leads to a
collapse in profitability. As level of profits
fall, employment and retail sales would be cut,
and consequently the sluggish economy will bring
about excess capacity and rising inventories.
The Korean and Chinese economy has resorted to
increased consumer spending to revitalise the
economy. Unfortunately, the fake wealth will
not resolve the fundamental economic imbalances.
Instead, the decline in interest rate that
resulted from credit expansion might cause more
economic problems
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2.
NOT ALL CONSUMERS (IF AT ALL) BEHAVE RATIONALLY
E.g. Some choose to consume harmful - instead of
healthful - substance (eg. cigarette, oily food,
artificial favours, etc.) --gt conditions that
need treatment (at a cost) Inappropriate choices
undermines spending capacity reinforcing
indebtedness
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Cont
3. ACTION AND REPERCUSSION
An irrational act, e.g. gambling and losing a
large sum of money, affects other consumers -
family and friends are first in line In an urban
setting, large losses send out a destructive wave
undermining a larger number of consumers
capacity to meet their own needs
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4.Closed Economy

• Y C I G
• Y National Income
• C Consumption spending
• I Investment spending
• G Government spending
• Increase national income, C

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Cont

• Open economy with international
• Trade
• Y C I G (X - M)
• where X values of export
• M values of import
• If consumers borrow to spend in
• neighbouring countries, then C
• will not be recorded fully in our
• GDP

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• 1. Credit spending is necessary because of
  changing needs associated with changing living
  environment, paradigms and mechanisms for
  transaction

• 2. In Brunei, credit spending is unlikely to lead
  to economic growth because a significant amount
  is spent outside the local economy (as is evident
  from the sluggish retail sector over the past 5
  years)

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• If credit spending is to invigorate the local
  economy, there is a need to divert spending
  outside Brunei to within Brunei

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• Note HSBCs credit redemption scheme is a good
  start as is the Economic Planning Units Brunei
  Grand Sales, but needs to co-ordinate with
  travel industry, retailers, financial
  institutions at deeper levels of planning to make
  Brunei a more attractive place to spend

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• Retailers authorities need to look closer at
  the range of consumers needs without
  preconception - if local retailers are to supply
  consumers demand

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• Efforts to improve quality of life, nurture and
  protect the self-esteem and dignity of
  individuals/groups, protect consumers from
  environmental threats - added to education on
  money matters is likely (from our analysis) to
  create a more conducive condition for
  credit-driven economic growth

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. It is not only about how you spend, it is
also about where you spend.
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Thank you
Endnote The purpose of this paper is to give
implications on credit consumption in small
states such as Brunei to see if the current
consumption pattern would sustain in the long
run, but by no means it wants to motivate
consumers to spend beyond their means.